NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market

Transcription

1 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market Vu Nhu Thang Nagoya University CALE Books 3

2 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market Vu Nhu Thang Nagoya University CALE Books 3

3 Center for Asian Legal Exchange & Graduate School of Law Nagoya University National Treatment Principle in GATS: A Study of Vietnam s Insurance Services Market Vu Nhu Thang Published August, 2008 Printed by the Nagoya University Consumers Co-operative Association, Nagoya, Japan Copyright 2008 Center for Asian Legal Exchange & Graduate School of Law Nagoya University All rights reserved. No part of this work may be reproduced copied in any form or by any means without written permission of the publisher. Furo-cho, Chikusa-ku, Nagoya JAPAN Phone: +81(0) Fax: +81(0)

4 Foreword This book is a product of Dr. Vu Nhu Thang s three-year research as a Ph.D candidate at the Graduate School of International Development, Nagoya University. Vietnam acceded to the World Trade Organization (WTO) in January 2007 and it marked a milestone in the history of its Doi Moi and the process of its entry into the global economy. While, as the 150th member of the WTO, Vietnam now can enjoy the benefit of non-discriminatory access to other members markets and, if any dispute, can take advantage of the WTO dispute settlement mechanism, it is also obliged to implement a lot of commitments it made upon accession, including tariff rate reduction, liberalization of service markets and improvement of intellectual property protection. Among others, the author focuses on the issues surrounding liberalization of the insurance market in Vietnam after the WTO accession, especially the national treatment principle of General Agreement on Trade in Services (GATS) and the so-called prudential exception in its Annex on Financial Services. In spite of their importance, WTO case law has not yet been so sufficiently developed on their interpretation as to give clear guidance to negotiators, legislators and other practitioners who are involved with service negotiations as well as domestic implementations of service commitments. Against such a background, PART I tries to clarify interpretations of the national treatment principle in GATS as well as the prudential exception by transplanting the interpretation of the national treatment principle in GATT and by relying on the interpretative approach adopted by panels and the Appellate Body in the WTO dispute settlement cases. I believe it is the first comprehensive and systematic research on these issues and is an invaluable contribution to our understanding of the GATS obligations not only in service sectors in general but also in financial services in particular. Based on the achievement in PART I, PART II goes on to introduce the history of Vietnam s insurance market, analyze Vietnam s relevant commitments, and discuss what challenges it will face and how it should tackle them. PART II also offers a very concrete roadmap for reforms of insurance regulations, especially for introduction of necessary prudential regulations. Given the fact that the Vietnamese Government will start to discuss amendment of Insurance Law this year and that the National Assembly plans to discuss it in , this book comes at a most opportune time and I am sure it can supply useful and reliable guidelines in the legislating process. Since the author has returned to the Ministry of Finance, which is directly in charge of such reforms, this is also a must-read book not only for Vietnamese but also for foreign businesses who would like to know which direction Vietnamese regulations on insurance markets will take. For three years, I have been enjoying advising, discussing with and learning from the author. I am very proud of being involved in education and capacity building process of such a talented young person who is now one of distinguished WTO law experts. Fujio Kawashima Associate Professor of Law Graduate School of International Development, Nagoya University

5 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 Acknowledgements My deepest gratitude goes particularly to my supervisor, Professor Fujio Kawashima, who has spent with me a great deal of his time shaping my understanding of various aspects of International Economic Law, reading my drafts, and providing suggestions, valuable advice and critical comments with kind patience. I am also deeply grateful to Professor Masanori Aikyo and Professor Hideo Yamagata for their thorough guidance on how to improve my research. A special note of thanks is extended to all my colleagues and friends in Hanoi for providing me the relevant materials and data on Vietnam s insurance market, and their long distance support. Their e-contribution is highly appreciated. I greatly appreciate Fordham Journal of Corporate and Financial Law, Manchester Journal of International Economic Law, Forum of International Development Studies, and Vietnam Law and Legal Forum for allowing me to incorporate my published articles in this book. I also wish to acknowledge the kind acceptance of the Center for Asian Legal Exchange, Nagoya University to publish my doctoral thesis as a CALE book. Last but not least, I owe my deep gratitude to my beloved parents for their greatest and warmest encouragement; my dearest wife, Hien Anh, for her understating, patience, sacrifice, everlasting love and constant faith in me; and my lovely daughter and son, Hien Minh and Quoc Minh, for their naïve inspiration and emotional support. Vu Nhu Thang

6 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market Table of Contents Foreword...i Acknowledgements... ii List of Figures... viii List of Tables... viii List of Charts... viii List of Abbreviations... ix Executive Summary...x INTRODUCTION...1 PART ONE: GENERAL ASPECTS OF THE NATIONAL TREATMENT PRINCIPLE IN INSURANCE SERVICES...9 CHAPTER ONE: Insurance Services under the World Trade Organization A background on insurance and international trade in insurance services Concept of insurance Rationale of insurance regulation International trade in insurance services The inclusion of insurance services into the World Trade Organization Before the Uruguay Round The Uruguay Round Trade in insurance services under GATS...20 (i) Scope of insurance services...20 (ii) Modes of supply...21 (iii) Outline of GATS Concluding remarks...24 CHAPTER TWO: Interpretation of the National Treatment Principle in GATS Remarks about the national treatment principle in GATS Similarities between GATT and GATS with respect to national treatment Similarities Possibilities of transplant Provision and case law of GATT Internal taxation and regulation affecting trade in goods Likeness...32 (i) Narrow interpretation in the first sentence of Article III:2...32

7 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 (ii) Broad interpretation of likeness with reference to directly competitive or substitutable products...34 (iii) Broad interpretation of likeness in Article III: No less favourable treatment National treatment principle in GATS: Interpretative issues Defining the scope of application of the national treatment principle Broad scope of measures affecting trade in services Uncertainty in determining likeness...45 (i) Like services...45 (ii) Likeness with reference to service suppliers and modes of supply Broad coverage of no less favourable treatment Towards a two-stage approach: A balance between conditions of competition in Article XVII and policy objectives in Article XIV The recognition of national legitimate policy objectives Necessity test A problematic approach Framing a two-stage approach Tentative conclusions on the national treatment principle in GATS...63 CHAPTER THREE: Special Factors in Interpretation of the National Treatment Principle Applicable to Insurance Services Literature review Interpretation of the prudential exception The concept of prudential in the insurance sector The work of the international standard-setting organization Interpretative approach to the exception Annex on Financial Services: The prudential exception to national treatment WTO jurisprudence on treaty interpretation Applying the interpretative approach to the prudential exception The prudential exception: Interpretative issues Determining legitimate policy objectives pursued by measures: the scope of prudential reasons...78 (i) Ordinary meaning...78 (ii) Ordinary meaning in the context and in the light of the object and purpose of the treaty...80 (iii) Conclusion under Vienna Convention Article (iv) Supplementary means of interpretation...81 (1) Preparatory note...81 (2) Note 1998 by the WTO Secretariat...83 (3) Trade Policy Review...84 (4) Scheduling practices of WTO Members...85 (5) Possibility of reference to the work of specialized international organizations..86 (6) Scholarly works...87 (v) Is a narrower or broader interpretation of the term prudential reasons acceptable?...87 (vi) Overall conclusion on the meaning of the term prudential reasons Identifying the connection between the prudential reasons and measures: for...90 (i) Is the necessity test appropriate?...90 (ii) An alternative interpretation by reference to relating to...91

8 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market 3.3 Applying the anti-avoidance provision Burden of proof Reframing the two-stage approach: A balance between conditions of competition in Article XVII and prudential reasons in the Annex on Financial Services Concluding remarks...99 CHAPTER FOUR: Post-Uruguay Round Negotiations on Insurance Services and National Treatment Commitments in Schedules of Selected Countries Post-Uruguay Round negotiations on insurance services: A brief history The Second Protocol The Fifth Protocol Re-examining the scope of the national treatment principle Scheduling methodology Remarks about commitments on national treatment Scope of the national treatment principle under the Understanding on Commitments in Financial Services Scope of the national treatment principle in the schedules (i) Scenario (1) (ii) Scenarios (2) and (4) (iii) Scenarios (3) and (7) (iv) Scenario (5) (v) Scenarios (6) and (8) (vi) Scenario (9) Revisiting likeness Reconfirming uncertainty of service classification Likeness by reference to modes of supply and like service suppliers Case study: China s measure on non-life insurance services (1) Whether a measure in question falls under the scope of Article XVII? (2) Likeness under Article XVII (3) Does this measure modify conditions of competition against foreign insurance services and service suppliers? (4) Justification under Annex paragraph 2(a) Concluding remarks CONCLUDING OBSERVATIONS OF PART ONE PART TWO: VIETNAM S INSURANCE SERVICES MARKET CHAPTER FIVE: Development of Vietnam s Insurance Services Market Economic development Overview State-owned enterprise reform and private sector development External trade and foreign investment Financial market liberalization Vietnam s insurance services market Before Period of After

9 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 Some observations Legal framework Introduction of insurance regulations Vietnam Insurance Law Concluding remarks CHAPTER SIX: Vietnam s Commitments on National Treatment and Implications for the Insurance Services Market Vietnam s commitments in insurance services (i) Scope of business (ii) Investment (iii) Movement of natural persons (iv) National treatment Implications for Vietnam s insurance services market More efficiency and stability Facilitation of investment and external trade Fierce competition Increasing regulatory transparency, equity and complexity Compliance with the national treatment principle Implementation of commitments in insurance services: experience of Japan, the EU and China Some remarks Implementation of commitments under Vietnamese legislation Interpretative issues in the light of the national treatment principle (i) Scope of insurance sub-sectors (ii) Measures affecting trade in insurance services (iii) Likeness (iv) The standard of no less favourable treatment Concluding remarks CHAPTER SEVEN: Enhancement of Vietnam s Prudential Regulations Technical provisions Are the technical provisions properly regulated? Some remarks Could actuarial principles support compliance with regulation on technical provisions? A need to strengthen the role of actuary in Vietnam Solvency margin Solvency margin under existing regulations Insurance companies in financial difficulty (i) Minimum solvency margin (ii) Available remedial measures in case of financial difficulties Some observations Policyholder protection fund (i) A theoretical approach (1) Advantages (2) Disadvantages...185

10 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market (ii) Employing an adequate safety net: Foreign experience and lessons for Vietnam (1) United States (2) Japan (3) EU Some observations Future regulations on solvency margin (i) A call for more concrete determination of permissible assets (ii) A need for the inclusion of claims criterion for calculating the minimum solvency margin of non-life insurers (iii) A call for more detailed control levels (iv) Call for establishment of a policyholder protection fund Regulation of reinsurance services Current arrangement on reinsurance services A need to consider reinsurance risk Investment rules Vietnam s current regulations Foreign experience A need for more concrete investment rules Regulation of insurance intermediation How regulations on insurance intermediation could enhance the solvency of insurers A call for more concrete regulations on intermediation Regulation of insurance holding companies Is the supervisory authority adequately empowered to supervise the solvency of insurers? Lessons from other jurisdictions A need for clearer power of the supervisory authority with regard to insurance holding companies Limits to the legal reform Factors influencing the enhancement of prudential regulations Unsolved issues and future study CHAPTER EIGHT: Conclusions BIBLIOGRAPHY...218

11 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 List of Figures Figure 1: Outline of GATS rules...23 Figure 2: Scope of application of the national treatment principle...43 Figure 3: Analytical framework for interpretation of the national treatment principle: Twostage approach...61 Figure 4: Effective scope of the national treatment principle...63 Figure 5: Analytical framework for interpretation of the national treatment principle in the insurance services sector: Two-stage approach...97 Figure 6: Effective scope of the national treatment principle...98 Figure 7: Analytical framework of the two-stage approach towards interpretation of the national treatment principle: Example of China s non-life insurance services Figure 8: Roadmap for enhancing prudential regulations in Vietnam List of Tables Table 1: Modes of supply...21 Table 2: Commitments on National Treatment: By sub-sectors and modes of supply Table 3: Analytical scenarios on the scope of the national treatment principle Table 4: Vietnam s commitments in insurance services: past, present and future Table 5: Scheduled insurance services sub-sectors vs. Vietnam Insurance Law List of Charts Chart 1: Structure of Vietnam's insurance market players Chart 2: Growth of Vietnam's non-life insurance market Chart 3: Growth of Vietnam's life insurance market Chart 4: Investment sources by ownership Chart 5: Investment portfolios...140

12 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market List of Abbreviations ACP : African, Caribbean and Pacific countries BIDV : Bank for Investment and Development of Vietnam c.i.f. : cost, insurance, and freight COMECON : Council for Mutual Economic Assistance CPC : Central Product Classification CVA : Canadian Value Added DSU : Understanding in Rules and Procedures Governing the Settlement of Disputes EC : European Communities EEC : European Economic Community EU : European Union EUR : Euro GATS : General Agreement on Trade in Services GATT : General Agreement on Tariffs and Trade GDP : Gross Domestic Products GNS : Group of Negotiations on Services IAIS : International Association of Insurance Supervisors ICP : Insurance Core Principle MFN : Most-Favoured-Nation MOF : Bo Tai chinh (Ministry of Finance) (Vietnam) MTN : Multilateral Trade Negotiations NAIC : National Association of Insurance Commissioners OECD : Organization for Economic Cooperation and Development RBC : Risk-based capital SC : schedule of commitments SEACEN : Southeast Asia Central Banks SOE : State-owned enterprise The Annex : Annex on Financial Services, GATS UN : United Nations UNCTAD : United Nations Conference on Trade and Development US : United States US$ : United States dollars US-VN BTA : Bilateral Trade Agreement between the United States and Vietnam VND : Vietnamese currency (Dong) WTO : World Trade Organization

13 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 Executive Summary The birth of the General Agreement on Trade in Services (GATS), after eight years of negotiations under the Uruguay Round, has reflected the endeavour by contracting parties of the General Agreement on Tariffs and Trade (GATT) to extend the multilateral trading system from goods to include services. Certain GATT principles and obligations are reworded to apply to the service realm, including the national treatment principle. GATS Article XVII on National Treatment deals with discriminatory measures concerning the level playing field between domestic and foreign services and service suppliers. While national treatment in the context of trade in goods has been substantially explored and interpreted, the jurisprudence on interpretation of this principle in GATS is less developed. As both GATT and GATS are subject to a single dispute settlement mechanism under the WTO, there is clear rationale for transplanting GATT jurisprudence to the service sector. Furthermore, the language of national treatment articles in GATT and GATS shares a number of similarities, including likeness and the standard of no less favourable treatment. However, the fundamental nature of intangibility and non-storability of services, which is different from goods, has made the interpretation of national treatment principle more complicated in the context of services. The problems of uncertainty in interpretation of the national treatment principle in GATS would cause concerns over the liberalization of services in general and insurance services sector in particular by Members of the World Trade Organization (WTO). In contrast, the incorporation of the Annex on Financial Services, which covers the prudential exception to other obligations under GATS, including the national treatment principle, is proved to keep the right balance between liberalization and flexibility of Members in regulating domestic markets. A clear understanding of the prudential exception would contribute to facilitating ongoing negotiations on liberalization of financial services, including insurance services, by offering a way of balancing between rights and obligations of WTO Members, and providing a proper space for Members in introducing prudential regulations without prejudice to the predictability and transparency of the multilateral trading system. Therefore, the interpretation of the national treatment principle in the context of insurance services is proposed to follow a two-stage approach to determine, firstly whether a measure adopted by WTO Members accords less favourable treatment to foreign services and service suppliers than the domestic like counterparts, and secondly whether that less favourable treatment, if found, could be justified under the prudential exception. Three important understandings on the application of the national treatment principle in the insurance services sector have been found. First, the GATS national treatment principle is the object of both negotiations for liberalization and dispute settlement mechanism. A WTO Member, therefore, is obliged to respect the national treatment obligation as far as that Member inscribes which service sectors and/or sub-sectors in its schedule as well as levels of commitment. However, the scope of the national treatment principle in GATS addresses all discriminatory measures which do not fall within the scope of Article XVI on Market Access between foreign services and service suppliers, on the one hand and domestic counterparts, on the other hand. Second, similar to GATT national treatment in, the national treatment principle in GATS consists of three core elements for interpretation, namely measures affecting the

14 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market supply of services, like services and service suppliers, and no less favourable treatment. The WTO jurisprudence shows that the first element is broadly interpreted to encompass all measures directly and indirectly affecting trade in services. The possibilities of transplanting GATT jurisprudence on interpretation of likeness to GATS would lead the second element to a broad scope of likeness due to the uncertainty in criteria for comparing foreign and domestic services and service suppliers. The third element addresses a broad scope of discrimination, both de jure and de facto. In parallel with a broad approach to the interpretation of measures subject to GATS, the combination of uncertainty in interpretation of likeness and broad coverage of no less favourable treatment would lead to a high possibility for Members to violate national treatment in the context of services. Third, to justify a measure which is found to violate the national treatment principle affecting trade in financial services, including insurance services, a WTO Member is required to satisfy a three-layer examination under the prudential exception. Under the first layer, that measure must fall within the scope of the prudential reasons which could be understood to address the solvency situation of insurers to fulfill their obligations towards policyholders and other relevant persons, and towards the stability and integrity of the financial system as a whole. The second layer is to examine the connection between that measure and prudential objectives through a primarily aimed at test. Under the third layer, that WTO Member must prove that the application of the WTO-inconsistent measure does not constitute disguised restrictions on trade in insurance services. Accordingly, when a measure is found discriminatory against foreign insurance services and service suppliers compared to domestic like counterparts in the context of the national treatment principle, by an objective assessment, it would (i) not constitute a violation of this principle if it falls under the scope of prudential reasons and qualifies the anti-avoidance provision; or (ii) constitute a violation of the national treatment principle if that measure does not fall within the scope of prudential reasons or the application of that measure is proved to constitute a disguised restriction on trade in insurance services. As a WTO Member from January, 2007, in the insurance services sector, Vietnam undertakes direct insurance, reinsurance and retrocession, insurance intermediation, and services auxiliary to insurance for liberalization under the multilateral trading system. The full national treatment is inscribed in Modes 1, 2, and 3, and commitments with limitations in Mode 4. It means that, with respect to all measures affecting trade in insurance services under the meaning of GATS Article XVII, Vietnam is obliged to accord insurance services and service suppliers of any other WTO Member treatment no less favourable than it accords to its own like insurance services and service suppliers. While several inconsistent measures have been eliminated by the government right after the WTO accession, Vietnam is obliged to refrain from introducing any new measures which might constitute either de jure or de facto against foreign insurance services and service suppliers. However, the uncertainty in criteria for determining likeness of services and service suppliers under the meaning of GATS Article XVII might raise several possible violations of Vietnam s commitments on the national treatment obligation. Specifically, insurance brokerage and agency services could be regarded as like services if only criterion of service classification is taken into account for comparison. Similarly, the likeness might be established among those services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement. Accordingly, any different treatment, either de jure or de facto, against foreign services and service suppliers could be challenged by other WTO Members.

15 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 An overall evaluation of Vietnam s commitments under the WTO accession shows that Vietnam s insurance services sector has become more liberal to foreign participation and competition. Liberalization of insurance services under the WTO could offer some opportunities for further development of Vietnam s insurance market. Nevertheless, some threats of fierce competition and underdeveloped regulation should not be ignored, especially given weaknesses in both insurance companies per se and the whole financial system. In order to mitigate negative impacts of such threats, as well as maximize benefits of liberalization of the insurance services sector under GATS, more complex regulations should be enhanced in order to ensure the solvency of insurance companies for consumer protection as well as for the systemic stability. Under GATS, Vietnam is entitled to introduce prudential regulations to address the solvency situation of insurance companies. Prudential regulations also exist in the Law on Insurance Business of Vietnam. Compared to other jurisdictions, for example the EU, US and Japan, there are some problems in the current solvency system. First, while the technical provisions are properly regulated, the existing rules on actuary would not well support compliance with the regulations on technical provisions established by insurance companies. Second, existing regulations would simplify the credit risk and liquidity risk of those assets that can represent the solvency margin. Reinsurance risk is not appropriately addressed by the current regulations. In addition, what appear to be missing in the solvency regulations are concrete remedial measures corresponding to different quantitative solvency control levels in order to recover the solvency of a financially problematic insurance company. Third, investment rules seem to overlook the concentration risk in respect to assets held by insurance companies. Fourth, while insurance intermediation might significantly affect the solvency of an insurer, several specific measures addressing the credit risk of insurance brokerage companies as well as agents seem not to be strictly concretized. Last, regulatory weaknesses also exist in the supervision of insurance holding companies. Therefore, future solvency regulations should include: (i) enhancement of the actuarial role to support compliance with regulations on technical provisions; (ii) clear identification of permissible assets for calculating the solvency margin; (iii) incorporation of the reinsurance risk into the determination of solvency margin of insurers; (iv) inclusion of claims criterion for calculating the minimum solvency margin of non-life insurers; (v) more detailed quantitative solvency control levels to enable an early intervention by the supervisory authority in financially difficult insurers; (vi) concrete remedial measures corresponding to each solvency control level; (vii) establishment of a policyholder protection fund; (viii) introduction of more concrete quantitative limitations on maximum investment on each category of assets; (ix) limited relaxation on investment abroad from the technical provisions of insurers; (x) a more detailed requirement on the professional indemnity insurance to be kept by insurance brokerage companies; (xi) a pre-determined specific amount to be deposited by insurance agents; and (xii) concrete requirements on calculation of the adjusted solvency margin of an insurance holding company as well as group-wide information disclosure. All legal enhancements could protect the interests of consumers as well as improve public confidence, and consequently ensure the stability of Vietnam s insurance services sector after its accession to the WTO. During the introduction of the above-said new prudential regulations, Vietnam should refrain from any discriminatory measures, either de jure or de facto, against foreign insurance services and service suppliers. Nevertheless, some measures might be found in violation of GATS Article XVII due to uncertainty in the interpretation of the national treatment

16 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market obligation. In such a circumstance, it would be safe if Vietnam could prove that those new regulations and measures in the insurance sector are primarily aimed at the solvency of insurance companies in the meaning of paragraph 2(a) of the Annex on Financial Services. In addition, Vietnam must ensure that the introduction and application of future solvency regulations are in a manner of, inter alia, flexibility, consistency, necessity and transparency, in order to avoid the possibility of violating the anti-avoidance provision under the prudential exception.

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18 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market INTRODUCTION Insurance plays a crucial role in the economy (Skipper; and Outreville). By transferring risk to insurers, consumers are able to mitigate financial losses due to the occurrence of certain events. Insurance, especially life insurance, could be an important channel for mobilization of savings, which is then transferred to investment. By collecting premiums when issuing insurance policies, insurers are required to invest the funds in order to be able to satisfy future claims. Therefore, insurers, especially life-insurers who are involved in long-term insurance contracts, would be active institutional investors. 1 They would contribute to the efficiency of financial system by (i) reducing transaction costs, (ii) increasing liquidity, and (iii) facilitating economies of scale in investment. 2 In addition, financial systems would also be enhanced by different risk management techniques offered by insurers such as risk pricing, risk pooling and reduction. 3 Trade in insurance can make various contributions to the development of domestic markets. International spread of extremely large commercial risks, such as oil refineries and offshore rigs, satellites, jumbo jets, is necessary (Skipper; Feketekuty). At the multilateral level, trade in insurance services is governed by the General Agreement on Trade in Services (hereinafter GATS) since The birth of GATS, after eight years of negotiations under the Uruguay Round, has reflected the endeavour by contracting parties of the General Agreement on Tariffs and Trade (hereinafter GATT) to extend the multilateral trading system from goods to include services. Certain GATT principles and obligations are reworded to apply to the service realm, including the national treatment principle. GATS provides a set of multilateral rules to address both discriminatory and non-discriminatory restrictions, which affect trade in services in general and insurance services in particular. The national treatment principle deals with discriminatory measures concerning the level playing field between domestic and foreign services and service suppliers. In contrast to trade in goods, most restrictions on trade in services reside in national regulations (Feketekuty; Trebilcock and Howse). Since liberalization of trade in services ultimately requires the removal of those restrictions, the national treatment principle may be considered as one of the fundamental rules governing the multilateral trading system. However, the application of the national treatment principle is conditional upon schedules of specific commitments by Members of the World Trade Organization (hereinafter WTO). In other words, furthering trade in services largely depends on negotiations regarding the undertaking of commitments on national treatment by WTO Members, which follows the progressive liberalization approach. Contrary to GATT, where the national treatment obligation is generally applied without making any prior commitment, the inclusion of the 1 Carter, Robert Obstacles to International Trade in Insurance. In Edward P.M. Gardener, ed., The Future of Financial Systems and Services. Essays in Honour of Jack Revell, Macmillan, London, p Reprinted in Mervyn K. Lewis ed The Globalization of Financial Services. UK: Edward Elgar Publishing Limited, pp Skipper, Harold D. Jr Foreign Insurers in Emerging Markets: Issues and Concern. Washington, D.C.: International Insurance Foundation (Occasional Paper No. 1), pp Id. pp

19 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 national treatment principle in specific obligations is a distinguishing feature of GATS. This indicates that GATS national treatment does not apply automatically to all service sectors, but only applies to scheduled sectors and/or sub-sectors that a Member specifically lists in its commitments. Moreover, the scope of national treatment in GATS addresses not only trade but also investment since GATS encompasses the supply of services, inter alia, through commercial presence of foreign service suppliers. Accordingly, understanding the national treatment principle is necessary for dispute settlement procedures as well as scheduling national commitments on specific sectors or sub-sectors. As predicted by Hoekman, interpretation of countries schedules would constitute the main part of the panel process, in addition to fundamental principles. 4 While national treatment in the context of trade in goods has been substantially explored and interpreted, the jurisprudence on interpretation of this principle in GATS is less developed. As both GATT and GATS are subject to a single dispute settlement mechanism under the WTO, there is clear rationale for transplanting GATT jurisprudence to the realm of services. Furthermore, the language of national treatment articles in GATT and GATS shares a number of similarities, including likeness and the standard of no less favourable treatment. Interpretation of the national treatment principle in GATS, including transplant of GATT jurisprudence to GATS, has been discussed among scholars and practitioners (Mattoo; Krajewski; Zdouc). However, the fundamental nature of intangibility and non-storability of services (Feketekuty; Nicolaides), different from goods, makes the interpretation of the national treatment principle more complicated in the context of services. With regard to liberalization of the insurance sector by WTO Members, in addition to the national treatment principle in the legal text of GATS and their schedules of specific commitments, the applicability of multilateral rules to this complicated sector is also governed by the Annex on Financial Services (hereinafter the Annex), which constitutes an integral part of GATS under Article XXIX. Under this Annex, government is not limited in introducing prudential measures for consumer protection and systemic concern. The Annex also defines financial services to cover all banking and other financial services, and all insurance and insurance related services, which consist of: (i) direct insurance (life and nonlife); (ii) reinsurance and retrocession; (iii) insurance intermediation, such as brokerage and agency; and (iv) services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services. Literature review shows that liberalization in services in general and insurance services in particular requires careful regulation, including increasing the strength and quality of certain regulations, and introducing new rules that facilitate the transition to a more open system (Krajewski; Gamberale and Mattoo; and Skipper). A more liberal insurance sector, therefore, will require a more complex and effective regulatory and supervisory framework. When applying the national treatment principle to liberalization of the insurance services sector, as noted earlier, the Annex allows WTO Members to take prudential measures in regulating their financial systems, regardless of other obligations and commitments in GATS. Paragraph 2(a) of this Annex has been characterized as the prudential exception, 5 and 4 Hoekman, Bernard General Agreement on Trade in Services. In OECD, The New World Trading System: Readings. Paris: OECD, pp Whether paragraph 2(a) of the Annex constitutes a prudential exception in the financial services sector, including insurance services, shall be discussed in Chapter Three.

20 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market discussed among scholars (Key; Nicolaidis and Trachtman; Trachtman; Leroux; Mattoo; Dobson and Jacquet; and Panourgias) with regard to three factors, namely the concept of prudential reasons, connection between the prudential objectives and measures, and the anti-avoidance provision. However, these discussions have not yet incorporated sufficient analysis in the light of WTO jurisprudence, especially on interpretation approach. The issue of interpretation seems to be more difficult because there has been no WTO case so far relating to financial services in general and insurance services specifically. Accordingly, these uncertainties would discourage Members from undertaking commitments on national treatment for further liberalization of trade in financial services, including insurance services. Panourgias generally observed that the literature offers very limited clarification with regard to the term prudential as it applies to the financial sector. 6 The need for clarifying this prudential exception, especially the concept of prudential reasons, has become an issue of debate in the agenda of the Committee on Trade in Financial Services, and no agreement has been reached. 7 Moreover, as the scope and character of prudential measures are not specified, it is difficult to explain whether measures are permissible or not under the prudential exception during the on-going round of negotiations. 8 Therefore, a clear understanding of the prudential exception would contribute to facilitating on-going negotiations on liberalization of financial services, including insurance services, by offering a way of balancing between rights and obligations of WTO Members, and providing a proper space for Members in introducing prudential regulations without prejudice to the predictability and transparency of the multilateral trading system. In the case of Vietnam, in 1986, the VI Congress of the Communist Party launched a fundamental economic reform program - called doi moi (Renovation) - that marked the country s transition from a centrally planned economy to a market-driven economy with a socialist orientation. Key elements of this reform include (i) state-owned enterprise reform and private sector development, (ii) external trade and foreign investment, and (iii) liberalization of financial market. Along with the domestic economic reform, at the bilateral level, Vietnam has established and fostered economic relationships with other countries in order to facilitate foreign trade relations and integration into the world economy. The road towards a membership of the WTO has been marked by observatory status in GATT since June Vietnam became the 150 th Member of the WTO in January, Concerning the insurance services sector, Vietnam s commitments on liberalization of insurance services at the multilateral level are relatively liberal to competition by foreign insurance services and service suppliers. Especially, commitments in insurance services seem to be more liberal than those in banking and securities services. 9 Those commitments under 6 Panourgias, Lazaros E Banking Regulation and World Trade Law: GATS, EU and Prudential Institution Building. Oxford and Portland, Oregon: Hart Publishing, pp Committee on Trade in Financial Services, Reports of the Meetings held on 28 September 2004 (WTO Doc. No. S/FIN/M/46, 29 October 2004); 25 June 2004 (WTO Doc. No. S/FIN/M/45, 19 July 2004); 9 October 2000 (WTO Doc. No. S/FIN/M/28, 20 November 2000); 13 July 2000 (WTO Doc. No. S/FIN/M/27, 23 August 2000); and 25 May 2000 (WTO Doc. No. S/FIN/M/26, 29 June 2000). 8 Cornford, Andrew The WTO Negotiations on Financial Services: Current Issues and Future Directions. Geneva: UNCTAD (Discussion Papers No. 172), p See Vietnam Schedule of Specific Commitments, GATS /SC/142, 19 March 2007, pp While Vietnam undertakes full national treatment with regard to Modes 1, 2 and 3 in insurance services sector, it inscribes Unbound in both market access and national treatment columns on cross-border supply of banking and securities services, except for information transfer and advisory services. In addition, in the banking

21 CENTER FOR ASIAN LEGAL EXCHANGE, NAGOYA UNIVERSITY CALE BOOKS 3 Vietnam s schedule of specific commitments are legally binding to Vietnam, and require it to accord foreign insurance services and service suppliers no less favourable treatment than domestic counterparts under the meaning of GATS Article XVII on National Treatment. In addition, Vietnam shall permit direct branches of foreign non-life insurers from 2012 in conformity with prudential regulations. 10 As a WTO Member, under GATS, Vietnam is entitled to introduce prudential regulations to address the solvency situation of insurance companies in order to ensure consumer protection and the stability of the whole financial system. However, as mentioned earlier, the interpretation of the national treatment principle in the context of services, including insurance services and the prudential exception is less developed. On the one hand, this problem might create difficulties for practitioners and legislators in Vietnam in regulating the insurance market pursuant to prudential objectives. On the other hand, this problem might make Vietnam more vulnerable to violation of the GATS national treatment obligation. Accordingly, understanding on the national treatment principle is needed for Vietnam s implementation of its commitments on liberalization of the insurance services sector under the multilateral framework. Therefore, the object of this study is to answer, considering the above issues, three questions: How could the national treatment principle in GATS be understood and interpreted? What are the special factors in interpretation of the national treatment principle in the financial services sector generally and in the insurance sector particularly? Based on the understanding of the GATS national treatment principle, what should be done by Vietnam to comply with national treatment while regulating its insurance services market with a vision of ensuring consumer protection as well as the stability and integrity of the financial system? In order to answer these questions, the study is divided into two parts. Part One on general aspects of the national treatment principle in insurance services covers four chapters. Part Two on Vietnam s insurance services market consists of three chapters. The final chapter is conclusions. Chapter One includes a theoretical explanation on the concept of insurance as well as the role of insurance services and trade in insurance services in economic development. Based on a historical approach, this chapter also presents the inclusion of insurance services into the multilateral framework. This chapter points out that, at the conclusion of the Uruguay Round in 1994, the liberalization of insurance services under GATS was only agreed on rules and special factors of this sector as provided in the Annex, but not specific commitments by WTO Members. Chapter Two starts with some remarks on the national treatment principle in GATS. This chapter argues that in relation with Article XVI on market access, the scope of the national treatment principle in GATS would address all discriminatory measures which do not fall within the realm of Article XVI. sector, under Mode 3, Vietnam still reserves several limitations on the national treatment principle concerning conditions for establishment of branches of foreign banks, joint-venture banks, and wholly foreign owned banks. 10 Id. p. 38. See also WTO. Report of the Working Party on the Accession of Vietnam, WT/ACC/VNM/48, 27 October 2006, para. 494.

22 NATIONAL TREATMENT PRINCIPLE IN GATS: A Study of Vietnam s Insurance Services Market Based on reviewing GATT jurisprudence in interpretation of the national treatment obligation, this chapter demonstrates that although there are a number of similarities between the language of GATT Article III and GATS Article XVII, the transplant to GATS raises the high possibility of violation of the national treatment principle. The chapter argues that this problem results from both the broad scope of likeness, on the one hand, and the broad coverage of discrimination, on the other hand. A justification based on national legitimate policy objectives is submitted to balance this broad obligation. However, as this principle is interpreted in an objective manner, irrespective of national regulatory aims, the inclusion of regulatory objectives into this principle is proved to be unacceptable. Looking at different available approaches to reducing the uncertainty in likeness and limiting the broad scope of no less favourable treatment, the chapter comes up with a two-stage approach for the confirmation of breach of this principle whereby Article XVII should be read in connection with Article XIV on general exceptions, which provides a proper space for legitimate national policy objectives. Chapter Three explores the application of the national treatment principle to insurance services. The Annex, which is only applicable to the financial services sector, is proposed to provide a proper space for WTO Members to pursue their prudential objectives, and to constitute a second stage in the two-stage approach towards the application of the national treatment principle to financial services in general and insurance services in particular. By exploring some interpretative issues on the applicability of this prudential exception to trade in insurance services, this chapter argues that for a WTO Member to exercise the prudential exception, the Member is required to provide evidence that a measure which is inconsistent with GATS obligations satisfies a three-layer examination. First, that measure must be concerned with preservation of the solvency of insurance service suppliers to fulfill their obligations towards policyholders and other relevant persons, as well as towards the stability and integrity of the financial system as a whole. Second, a degree of connection between that measure and prudential objectives must be demonstrated through a primarily aimed at test. The third layer is to ensure that the application of that measure does not constitute disguised restrictions on trade in insurance services. This understanding of GATS prudential exception would maintain the balance between the rights of a Member to regulate its insurance services sector and the rights of other Members to rely on the performance of that Member s obligations and commitments with regard to liberalization of trade in insurance services. The agreement on liberalization of financial services sector, including insurance services, was achieved by the end of 1997, rather than at the time of conclusion of the Uruguay Round. Therefore, Chapter Four provides a brief history of the post-uruguay Round negotiations on this sector. The main part of this chapter reviews specific commitments on insurance services by the EC, US, Japan and China, in order to reexamine the interpretation of the national treatment principle in Chapter Two with regard to the scope of national treatment and criteria for examination of likeness among insurance services and service suppliers. An example of China s measure on the minimum capital requirement of branches of foreign nonlife insurance companies is analyzed and tested through the application of the two-stage approach, framed in Chapters Two and Three, towards interpretation of the national treatment principle in the insurance sector. This chapter points out that the examination of the schedules of specific commitments by the selected WTO Members reconfirms that the scope of application of the national